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ON THE LEFT: Income inequality still a challenge


ALICIA RAMBALDI

ON THE LEFT: Income inequality still a challenge

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THERE HAVE BEEN different patterns in macroeconomic aggregates (income, consumption, government and investment) over the period 1971 to 2012 and across the countries in this vast and heterogeneous region Latin America and the Caribbean (LAC).

However, there is one pattern that appears to emerge for the majority, real income per capita has been increasing since the beginning of this century.

This is not uniform and the source of the growth differs across economies.

Trends in income per capita are only partial indicators of prosperity as they do not provide information about the distribution of income.

Growth in income per capita, although a necessary condition, does not immediately imply higher standards of living for all.

However, a report by the Poverty, Gender and Equity Unit from the Latin America and Caribbean Region of the World Bank produced in 2013 indicates extreme poverty was cut from 25 per cent of the population to 13 per cent during the 2000s.

While this is very promising, they also emphasise that LAC is still far from reaching the low levels of income inequality found in high income economies.

The Caribbean is a very heterogeneous region. There are countries such as Aruba, part of the kingdom of The Netherlands, with a very high income per capita of US$35 200 in 2007 (down to US$29 800 in 2012) to Haiti with an income per capita of US$925 in 2012.

The Dominican Republic and St Lucia represent economies with growth, Jamaica and Haiti represent stagnant economies, Grenada and St Vincent and the Grenadines represent stagnation to growth patterns.

For the Dominican Republic, private consumption would appear to be the main driver of the upward slopping income per capita as government consumption and investment have been steady over the period. St Lucia’s pattern is different in that private consumption has been more volatile while government and investment have had a steady increase.

The trends indicate increasing prosperity; however, it is important to recognise that sustained growth and welfare gains do not immediately follow unless there is a sustained effort to reduce income inequality, which is not investigated in this study.

The patterns of real investment, private and government consumption are much more heterogeneous across countries.

Increasing real private consumption would seem to be the most common underlying reason for the rise in real incomes; however, some of the best performing economies show clear increases in real investment since the early 2000s.

The majority of South American countries – Panama, Mexico and most Caribbean economies – have either maintained or increased real levels of investment.

The shares of government consumption expenditures have been more varied across countries; however, there is some evidence that after the global financial crisis (2007-2008) a few economies increased real government expenditures when investment shares decreased.

This strategy might have resulted in a number of these economies managing to maintain a steady level in income per capita over the period following the crisis.

Alicia Rambaldi is an associate professor in Econometrics at the School of Economics, The University of Queensland, Australia.

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